Feds buy Trans Mountain pipeline for $4.5B — but can they sell it?

CALGARY — The Canadian federal government will likely have a difficult time selling the Trans Mountain pipeline system it purchased for $4.5-billion on Tuesday until it can show the risks to the project have been reduced.

The federal government announced a deal with Houston-based Kinder Morgan Inc. to purchase the existing Trans Mountain pipeline between Alberta and British Columbia, as well as the expansion project to twin the pipeline, before markets opened Tuesday and Finance Minister Bill Morneau said Ottawa did not intend to be a long-term owner.

But analysts believe Ottawa will need to provide the same financial indemnity it offered to Kinder Morgan to any potential buyer for the pipeline before it can sell it.

“Those guarantees are still going to be required in my opinion,” said Canaccord Genuity analyst David Galison, who added that British Columbia’s opposition to the project would continue to pose a threat to its construction.

In a research note, he said that Calgary-based pipeline giants Enbridge Inc. and TransCanada Corp. would be likely buyers if they “were able to secure sufficient security from the government.”

Until that time, and until the court challenges to the project are resolved, Galison said, “I don’t believe it does increase certainty.”

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How the Trans Mountain Pipeline saga unfolded: Key dates from 1953 to now

Trans Mountain pipeline was extended with the route taking it through Jasper National Park and Robson Provincial Park.

A map of the proposed expansion of the Trans Mountain pipeline.

RCMP officers take protesters into custody at a Trans Mountain demonstration in Burnaby, B.C., on Nov. 20, 2014. Jonathan Hayward/The Canadian Press

Alberta Premier Rachel Notley has been a tireless advocate for the completion of the Trans Mountain pipeline expansion.Jason Franson /The Canadian Press

The main pipeline that feeds oil to British Columbia is seen at the Kinder Morgan Trans Mountain facility in Edmonton.Jonathan Hayward/The Canadian Press

Prime Minister Justin Trudeau announces the the approval of Kinder Morgan's proposal to triple the capacity of its Trans Mountain pipeline.Sean Kilpatrick /The Canadian Press

Then B.C. premier Christy Clark was a supporter of the Trans Mountain expansion.Darryl Dyck/The Canadian Press

B.C. Green party leader Andrew Weaver and B.C. NDP leader, and now Premier, John Horgan speak to media after announcing they'll be working together to help form a minority government during a press conference at Legislature in Victoria, on May 29, 2017.Chad Hipolito /The Canadian Press

A protester stands on top of a trailer outside the main gates of Kinder Morgan in Burnaby.Jonathan Hayward/The Canadian Press

tanker is anchored in Burrard Inlet just outside of Burnaby.Jonathan Hayward/The Canadian Press

Demonstrators sit in front of a transport truck attempting to deliver heavy equipment to Kinder Morgan as others block a gate at the company's property in Burnaby, B.C., on March 19.Darryl Dyck/The Canadian Press

Kat Roivas, who is opposed to the expansion of the Kinder Morgan Trans Mountain pipeline, stands at an access gate at the company's property near an area where work is taking place, in Burnaby April 9, 2018. Darryl Dyck/The Canadian Press

The head of Canada’s pipeline industry group expressed similar concerns.

“We do not believe that this outcome will instil investor confidence in Canada,” Canadian Energy Pipeline Association president and CEO Chris Bloomer said in a release, in which he added that he was pleased the project would be built.

Bloomer cautioned however that Ottawa’s purchase of the project would send a negative signal to investors.

“CEPA is deeply concerned that the government needed to purchase the project for it to be built and to assert federal jurisdiction,” Bloomer said. “The project has always been in the national interest.”

Other analysts, however, believe the deal does reduce the risks inherent in the project.

“I’d say the deal is a slight positive as it helps reduce balance sheet leverage and removes this significant project execution overhang,” St. Louis-based Edward Jones analyst Jen Rowland said in an email. She added that there is bad news for Kinder Morgan because the company’s “growth outlook is muted” without the expansion project.

Other analysts believe that the Trans Mountain expansion project, if it could be built, is capable of delivering value for the owner.

Morneau went out of his way Tuesday to describe how the pipeline and expansion project had value for Canadians and would provide a boost to the Canadian economy. “This purchase creates value for Canadians,” he said.

Other analysts believe the project, if built, would be a marketable asset.

“They have 10 to 20 years of firm commitment for shipments so from an investors perspective, there aren’t too many projects like this that can provide that type of certainty in terms of cash flow over that period,” said ARC Energy Research Institute senior director Jackie Forrest.

She said the deal announced before markets opened Tuesday would also provide a boost to the Canadian energy industry – both for producing companies and the outlook for domestic crude oil prices.

“Canadian equities have been beat down relative to their U.S. peers and certainty around takeaway capacity will be helpful in getting fair value for Canadian crude oil as well as Canadian companies,” Forrest said.

Shares in Kinder Morgan Canada Ltd. jumped 2.5 per cent on the Toronto Stock Exchange as the market opened on Tuesday morning, reaching $17 per share on the news that its Houston-based parent company had struck an agreement with Ottawa.

“We think this is a great day not only for our company but also for Canada and we’re happy to be participating in it,” Kinder Morgan CEO Steve Kean said in a conference call announcing the sale of Trans Mountain pipeline system and its expansion project.

Back in April, Kean had threatened to cancel the project unless Ottawa could provide assurances the company would be able to construct the pipeline through B.C. He also asked Ottawa to provide financial assurances the company wouldn’t lose money building the $7.4 billion expansion to the system given the B.C. NDP government’s continued opposition.

With the agreement reached Tuesday, the company announced construction would resume and would be funded by the Canadian government.

“Our Canadian employees and contractors have worked very hard to advance the project to this critical stage, and they will now resume work in executing this important Canadian project,” Kean said in a release.

In a separate event, Finance Minister Bill Morneau and Natural Resources Minister Jim Carr announced the federal government would use loan guarantees to ensure construction continues throughout the year.

“Our government believes that the commercial agreement we have reached with Kinder Morgan is the best way to protect thousands of good, well-paying jobs while delivering a solid return on investment for Canadians. This is an investment in Canada’s future,” Morneau said.

Morneau also indicated that the federal government didn’t want to own the Trans Mountain system long-term and would work with Kinder Morgan to identify a third-party buyer.

“We will be paid the $4.5 billion even if a third party buyer is not found,” Kinder Morgan’s Kean said Tuesday.

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